The Financial Reporting Council (FRC), which is responsible for oversight of accounting standards, has been asked by the Morrison government to review the adequacy of auditor disciplinary functions operated by the Australian Securities and Investments Commission and professional accounting bodies including Chartered Accountants ANZ.

For its part, CA ANZ echoed the confidence of the FRC in the current standard of audits when it told AFR Weekend that ASIC's report, which was released on Thursday, showed audit quality is "heading in the right direction". This was due to the "huge ongoing efforts" of the firms that carry out the majority of large corporate audits, CA ANZ said, referring to the big four consulting outfits Deloitte, EY, KPMG and PwC.

The big four are looking at ways to improve audit quality, according to accounting body Chartered Accountants ANZ. Ryan Stuart

Auditors at the big four are typically chartered accountants, having trained and earned their professional accounting qualification from body. In turn, CA ANZ is responsible for educating, setting standards for the profession and disciplining its members.

The Parliamentary Joint Committee on Corporations and Financial Services recommended that the government "review the adequacy of auditor disciplinary functions" last year after hearing about the irregular workload of the the Companies Auditors Disciplinary Board, a body that considers whether auditors suspected of failing to carry out their duties should have their licenses suspended or cancelled.

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The board, which must rely on referrals from ASIC or the prudential regulator, only had one case referred to it in 2016-17 and heard matters that resulted in the suspension of one registration and one undertaking during that year. In 2017-18, the board again only had one case referred to it and issued no sanctions.

Auditor discipline

The FRC review of the auditor disciplinary regime will look to report to the government by March, said chairman Bill Edge.

"We are looking at the disciplinary function of auditors as performed by ASIC and the accounting bodies to be able to report on their adequacy," he said. "That is quite integral to this whole issue of auditor quality."

He urged interested parties to contact the FRC to share their views and recommendations about audit quality.

"The FRC would welcome views of stakeholders such as preparers, audit committee chairs and investors to the dialogue around audit quality," he said.

Mr Edge said the body had an existing and ongoing body of work, its Audit Quality Action Plan, which has so far found no systemic problem with audit quality.

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"The FRC is confident that the leadership of the accounting firms in Australia are displaying appropriate seriousness about concerns over audit quality and are continually implementing initiatives to address the issue," he said.

In a release put out after the ASIC audit quality report was published, the FRC noted that "since the start of the Audit Quality Action Plan, the FRC has found no evidence of systemic issues or major concerns that external auditing was not satisfying its core role of maintaining trust and confidence in financial statements prepared by companies through stakeholder consultation".

Firms responding appropriately

The FRC has also noted in an Audit Quality Action Plan update that its "regular discussions" consultation with the big four consulting firms had left it confident with the level of action being taken within the industry.

"The FRC is confident that the leadership of the big four accounting firms in Australia are responding appropriately to the concerns over audit quality," it stated. "The largest firms are demonstrating clear commitment to improve audit quality.

"I would like audit committee chairs to see the audit as a more valuable service. We would prefer that the audit not be seen as a commodity," he said.

'Right direction' on audit quality

The ASIC audit quality report, which uses a risk-based sample of work, found there was 20 per cent deficiency rate for the 18 months to June 30, 2018, down from 23 per cent in the 18-months to December 31, 2016, but still higher than the 18 per cent rate recorded for the 18 months to June 2015.

ASIC reported at least nine of the 98 audits reviewed contained material misstatements that had not been identified, a situation ASIC commissioner John Price suggested meant that "further work and, in some cases, new or revised strategies, are needed to improve quality".

ASIC commissioner John Price said more needed to be done to improve audit quality over the long term. ryan.stuart@fairfaxmedia.com.au

"I really do think that audit quality is heading in the right direction. There is clear evidence of the enormous efforts of the firms and the profession to promote continuous improvement," he said.

"There has been efforts with the larger firms at root cause analysis to look at these findings and go a bit deeper and work out what is underlying them. That provides really valuable insights on how you can improve systems, processes.

"All the signals point to it working pretty well. We have a market that works and it works well. We think there is a good level of confidence in the market."

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Edmund Tadros is an award-winning journalist who leads our coverage of the professional services sector. He is based in our Sydney newsroom. Connect with Edmund on Twitter. Email Edmund at ed.tadros@afr.com

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